During the Republican Presidential debate in Iowa, Mitt Romney argued for replacing our current unemployment insurance with a system of unemployment savings accounts. Romney (transcript): “But I would far rather see a reform of our unemployment system, to allow people to have a personal account which they’re able to draw from as opposed to having endless unemployment benefits….if I were president right now, I would go to Congress with a new system for unemployment, which would have specific accounts from which people could withdraw their own funds.”

Suzy Khimm has more, while Crooks and Liars has video and notes that this proposal looks a lot like a policy paper from the Mercatus Center. A proposal where, instead of contributing to a public trust fund for UI, employees create a savings account while working that has money automatically channeled into it tax-free to be drawn down during periods of unemployment.

We’ve tried to generalize a contrast between a liberal and neoliberal ideological policy agenda at this page before. I often think if we created the social safety net for the first time right now we’d see something very different. In particular, if we had to create unemployment insurance in this neoliberal era I think we’d see something like these unemployment insurance savings accounts instead of the unemployment insurance system that came into being with the 1935 Social Security Act (an act which celebrated its 76th birthday Sunday – Happy Birthday Social Security!).

You could even see a sprawling wonky policy debate. There would be a left-neoliberal unemployment insurance savings account that matched contributions for low-wage employees and an innovative-neoliberal unemployment insurance savings account which completed markets by allowing for the unemployed to borrow against future earnings within the fund at low rates. An entire debate that took place within the policy walls of an individualized UI benefits given through the tax code.

As such, we can use this as a learning moment to contrast the liberal policy of unemployment insurance as it exists now with a neoliberal approach – an approach to governance where the state’s role is one of creating and completing otherwise incomplete markets. What are the differences between our current approach and the Romney approach?

The first difference is that the unemployment insurance savings accounts don’t actually involve what the liberal government does best: social insurance. There’s no risk pooling or sharing risks along large populations in order to take advantages of the traditional benefits of insurance. Whether or not you view the ideology of insurance as sound actuarial reasoning or as a form of solidarity doesn’t matter because the actual mechanisms of insurance don’t exist in this plan.

Part of the point of social insurance is that it is social; we help others and they help us through a government which shapes our obstacles and opportunities. This is lost in the world of individual savings accounts. In this world there are just isolated, atomized individuals, absorbing the entirety of the economic risks of unemployment all by themselves.

The second is that redistribution in the Romney suggestion is quietly upwards, towards the richest, instead of obviously towards those in need. Like any welfare spending through the tax system, it benefits those who pay the most in taxes and those who have the ability and means to take advantages of it through disposable income and tax sophistication – and these unemployment savings accounts work that way. The current way unemployment taxes are collected (taxes levied on the first $7,000 of wages) is regressive, but it goes to those who have hit a spell of unemployment. Those who are most in need take the full advantage of it regardless of their ability to hire a tax accountant.

The third is that it weakens the power of the unemployed. Unemployment insurance increases the time until the unemployed take their next job. Cutting-edge econometric research tells us that the majority of this is a “liquidity” effect as opposed to a work disincentive effect – people are taking the time they need in order to find the best job for themselves instead of taking the quickest job in order to make basic payments. This gives the unemployed more choices and, as Acemoglu and Shimer argued, can create a better economy with more output and productivity.

However what is good for the economy isn’t necessarily better for any individual employer, and by empowering the unemployed and giving them breathing space to search for the best job also enables them to search for the best wage to go with their job. Switching this system of unemployment insurance throws off this balance between workers and bosses in favor of the latter. It reduces aggregate labor bargaining at a time when it is precariously weak.

A fourth is that it is hard to scale outwards in cases of emergency. In a recession it is very easy to extend unemployment benefits. These unemployment savings accounts would be difficult to expand in any sense – as such it takes a serious mechanism of “automatic stabilizers” out of commission. If your goal is to thwart the ability of the government to counter the business cycle and to shred anything that hints of Keynesian counter-cyclical spending, this would be a major home run.

And the fifth and last point is that it removes the idea of the government from the equation of people dealing with economic risks. Like much of the “submerged” state, people will look at private savings accounts and think that the government isn’t doing anything. Even if there are substantial tax benefits people will, rightfully in my humble opinion, ignore this because the government isn’t doing what the government is best at – absorbing risks. All the government is doing is setting the stage for the individual to confront the entirety of their economic risks by themselves. There’s no social to this program and thus no politics and thus no real political constituency for it.

This is my quick read, and I’d really enjoy your thoughts. What do you think about the difference of the two approaches?

How many special accounts are people going to have? Retirement (401K, 403b, IRA, Roth IRA), education (529, Coverdell), medical (HSA), and now unemployment? How does having eight different accounts help anybody? I have just a mutual fund account and a credit union account and that’s enough hassle as it is.

All these special accounts provide deductions (not credits), so they’re more valuable to people in higher brackets than in lower brackets. I’m sure this point has not escaped the rightwingers.

And look who gets paid to administer them all! The same crooks who sold us down the river in the first place. If I hear one more politician say he wants to “give me back control of my future” or some such bilge water, I’ll scream. That’s what Dubyah said when he tried to hand all our retirement funds over to the vultures on Wall St. I’m willing to “take responsibility” for myself, but I think it’s high time the titans of industry took responsibility for what THEY create – or don’t (jobs).

On the subject of the Mercatus Center, can we organize a campaign to punch any DC liberal blogger in the nuts if he (and it’s always a he) says how smart Tylen Cowen is, or links approvingly to that asshole? The guy is playing for wrong team. I’d do it myself but I live 3000 miles away.

What’s interesting here is that the ‘anti-government’ in this idea is NOT about keeping govt out of your finances… It merely makes it less effective and more of an obnoxious ‘nanny’, which would of course lead to more claims of useless govt interference…and the cycle continues.

“But I would far rather see a reform of our unemployment system, to allow people to have a personal account which they’re able to draw from as opposed to having>>> endless unemployment benefits<<<<….if I were president right now, I would go to Congress with a new system for unemployment, which would have specific accounts from which people could withdraw their own funds.”
Why don't we ask the people whose unemployment benefits have run out about the limitless nature of UI?

The role of government is to do the things that private industry does not do (notably, as it is pointed out here, absorb risk). Of course, this will somehow wind up adding to the capital controlled by private banks as well.

It’s still possible to provide social insurance through these accounts if you continue to pay benefits when people run their balances to zero. It’s just that the first payments would come out of a personal account. It’s sort of like a high-deductible insurance plan. Another source that makes this point is Feldstein and Altman (2006).

That still leaves your points 2, 4, and 5 untouched. Probably point #5 is enough to argue against switching to accounts, though it’s a point that only behavioral economists would concede. Point #4 is very important, if Grover Norquist types retain influence. You also left out the cavalry of special interests that would swoop in to lobby for the rights to manage the savings accounts.

Several differences. One is that, like Social Security private accounts, it’s a stepping stone in getting rid of the unemployment insurance. Second is that plenty of money might be stripped off as fees of some sort or others, to go to the banksters. Third is that banks may offer loans with the amount as collateral, and there it disappears.

I would say the problem with using this to exemplify the flaws of neoliberalism is that I don’t think a neoliberal would like it. Its a fundamentally different product than UI — it is a savings account, not an insurance product. So we don’t have an example of restructuring policy to accomplish the same objectives in a more efficient way using market mechanisms, we just have a different objective (allowing people to more efficiently smooth their own earnings) that is (in my mind) a worse one than providing unemployment insurance.

Now, if the UI system was inefficient and corrupt, maybe neoliberals might suggest subsidizing private insurance to handle UI instead of direct provision but as far as I can tell, the UI system is administered fine (which is not to say whether the benefits are too stingy or too generous, that is a different conversation).

«unemployment insurance system that came into being with the 1935 Social Security Act»

Which is extremely flawed itself, because it is an unfunded mandate and has a very limited insurance component.

In the current system, there are already unemployment accounts, but they are per-employer instead of per-employee, that is employers are effectively taxed to fund unemployment benefit, and the tax goes up in proportion to how many employees the employer gets rid of, except for employees who resign or are fired for cause.

Therefore many employers try very hard to bully employees to resign or try very hard to find excuses to fire employees for cause, to save on increased contributions to their unemployment account.

So the insurance effect of current unemployment accounts is mostly extended to employees of the same employer, and like all insurers the employer tries hard to avoid having to pay on the insurance, one way or another.

«All the government is doing is setting the stage for the individual to confront the entirety of their economic risks by themselves. There’s no social to this program and thus no politics and thus no real political constituency for it.»

Well, middle class and middle aged/retired voters who own property (401k and real estate) don’t see any reason why they should be taxed to pay for a life of idle luxury for minorities who don’t want to get a job, because there is no such thing as unemployment, just demanding too high a salary. These voters identify the unemployed (which are most minorities anyhow) as the exploitative class.

One irony about all this is that Romney is a member of the LDS and they pay into common social funds a large chunk of their earnings, and this is used to help members who are unemployed too. No individual accounts there.

Well, for neoliberals it is morally corrupt: it punishes deserving productive businessmen by giving lazy exploitative minorities the means for a life of idle luxury.

For other it is also inefficient, because limiting the insurance pool to one account (one employer) is too restrictive and gives employers incentives to avoid paying out by behaving badly to employees.

>because there is no such thing as unemployment, just demanding too high a salary.

…and this attitude exists precisely because economists themselves do not understand how unemployment can exist.

Note the recent post that included the modelling of unemployment, by one of the 12 (?) people who administer the Fed or whatever, that included exactly zero information on the price levels people are willing to pay in its model, and the absence of any mention of this in the criticism of that approach.

Here’s a question: if people had the option of getting exactly the same compensation for working 50% less than the do at current, and having the same promotion prospects and protection from being fired, would people do it?

If the answer is that they would not, it shows that under the current framework, people feel they have negative utility from “leisure” time, which a rational person might expect would have radical implications for how economics approaches the concept of unemployment.

Until then, they will have no answers to, or explanations for critiques like this one that the unemployed are just lazy and that’s why they have higher suicide rates, etc.

One of the reasons health insurance works is that ill health is unpredictable. In most years you’re in good health – you’re most likely in the bottom 50%, if not the bottom 80%, of health care costs. Some years, you’re not. Over time and with enough people, it averages out and an insurer (Medicare’s also an insurer) can charge you some premium that’s related to your average expenditure, minus administrative fees, loss reserves, profits (if applicable), etc.

That premium is affordable. Maintaining a cash reserve in some dedicated account would not be affordable for most people. For example, when I got hit by a pickup, my initial hospital bill alone (minus outpatient therapy) was $90,000. I do not have the ability to maintain a reserve of $90,000 just for medical bills.

Furthermore, most people don’t get into the top 20% in any one year – or they might only hit that level of cost in one or two years out of their lives. There’s always the risk that you’d hit that level of cost, of course, but because most people don’t. So, you subsidize the people who do hit that level of expenditure, but you lose most of the financial risk of hitting that. The average medical costs for a 4-person family were about $15,000 last year (iirc) – if medical expenditures were equally distributed, you could just put that sum away each year, and it would be less infeasible than putting away $90k in case you had a really bad one. But they aren’t equally distributed.

That’s why risk pooling is important. And the above applies, albeit with different numbers, to unemployment.

«One of the reasons health insurance works is that ill health is unpredictable.»
«That’s why risk pooling is important. And the above applies, albeit with different numbers, to unemployment.»

Until the Obama proposal, there hasn’t been any provider of healthcare insurance in the USA for a few decades.

Every healthcare “insurer” does no risk pooling, they have a policy that each account must be profitable over its lifetime. So each account is effectively a standby loan facility, with a maintenance fee. So individuals and small groups don’t pool at all or much, and only large companies benefit from risk pooling.

Part of the reason there is no health insurance product is that it invites self-selection; but I think that the largest part is that is profitable to sell a cheaper loan facility when almost every customer thinks it is more valuable insurance and pays accordingly.

Unemployment accounts are similar (no risk pooling across employers) but the reason there is different: it is the simplest way to have a self-funding system, that is an unfunded mandate, just like say for maternity cover or sick days etc. (where these are mandated).

I think there is probably also a submerged “family values” angle. The broke unemployed person has to move back in with his or her parents, then takes care of them as they age. Less expenses for Medicaid nursing homes, too.

what it all boils down to is do you still believe the old reagan malarkey that government is the enemy of business & we the people? corporations are the enemy period, they are why america is in such an economic mess. romney just wants to move farther to the right than the bumbling obama.